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Rupee May Rise to 58/Dollar if 50% Black Money Returns: Report

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Rupee May Rise to 58/Dollar if 50% Black Money Returns: Report

The process of unearthing crores of black money reached another milestone on Wednesday with the government submitting to the Supreme Court a list of 627 Indians who hold foreign bank accounts.

The estimates of how much black money is stashed abroad have varied widely. Some studies estimate black money at just $2 billion (nearly Rs 12,000 crore), while others peg the amount at staggering $2 trillion (Rs 120 lakh crore), which is roughly the size of our economy. (Read)

There has been a clamour to repatriate the black money into the country. If billions of dollars are remitted back into India, the Reserve Bank will add substantial foreign reserves to its kitty. Such a scenario will give a big boost to the economy as India runs a current account deficit.

The repatriation of billions of dollars' of black money will be particularly beneficial for the rupee, which has stayed above 60 per dollar for a long time now.

However, expectations that the rupee will rally sharply and slip below 50 per dollar if black money is repatriated are exaggerated, say analysts. Bank of America Merrill Lynch analysts researched the black money issue and concluded that the rupee is unlikely to appreciate much even if half of black money stashed abroad is brought back in to the country.

Their optimistic scenario for the rupee is a rise to 58 per dollar and base case estimate is the rupee stays between 58 and 62 per dollar in the medium term.

Here's how Bank of America arrived at its conclusion,

1) The investment bank estimates black money at $200 billion (Rs 12 lakh crore) based on a recent study by Raghbendra Jha and Duc Nguyen Truong of Australian National University.

(Also read: Billions of Dollars in Black Money? Think Much Smaller, Say Sources)

2) If half of this black money is unearthed ($100 billion) and taxed at 30 to 35 per cent, the Reserve Bank's foreign reserves will swell by around $30-35 billion (around Rs 2 lakh crore).

3) The $30-$35 billion accumulated through taxation of black money could add three to four months of import cover to RBI's forex reserves, Bank of America says. Currently, India's import cover is running low at 8.3 months. The import cover needs to go up for the rupee to rise, Bank of America says.

4) In December 2007, India's import cover was at 14 months and the rupee was around 39 per dollar. So, the additional 3-4 months of import cover that the RBI will get from black money proceeds will have limited firepower to support the rupee.

5) The additional revenue raised through taxes will add to India's overall GDP, the investment bank says.



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